Does PPF create more wealth than debt MFs?
Public Provident Fund, also popularly known as PPF, is an investment option that people trust their money with. The reasons for its popularity are obvious, viz., backing of the Government of India, attractive interest rates as compared to traditional bank FDs and, most importantly, its Exempt-Exempt-Exempt (EEE) tax status. Not just that, you can also claim deduction up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961. On the contrary, although the debt funds have the capacity to fetch more returns for the investors as compared to PPF, these funds come with Exempt-Exempt-Tax (EET) status. The taxation part makes people rethink about investing in debt MFs.
However, to understand PPF better, let us assume that you are investing Rs. 1.5 lakh every year in PPF (this is the maximum limit of investment in PPF) with 8 per cent rate of interest (w.e.f. April 1, 2019 and assuming it to remain constant for the next 15 years). On maturity, you would receive Rs. 43.99 lakh. Now, let us see how much wealth debt MFs can create in 15 years. To make a fair comparison, we have assumed that you would be investing in medium to long duration fund with average 5-year CAGR of 7.76 per cent. So, if you invest Rs. 1.5 lakh every year in this debt fund for the next 15 years, it would accumulate to Rs. 43.08 lakh.
Now, you may think that there is not much of a difference. However, it is to be understood that the amount calculated for the medium to long duration fund does not account for the Long Term Capital Gain (LTCG) tax, which would further reduce the returns. On the contrary, as PPF enjoys EEE tax status, all the wealth created is tax-free. This way, PPF is a better option. However, there are certain things which you need to understand before investing in PPF. PPF loses its advantage when it comes to liquidity. Though it is not completely illiquid, there are certain limitations and restrictions when it comes to withdrawals that can be made from PPF. Therefore, in terms of liquidity, the debt MFs score over PPF. However, your investment decision should depend on your requirements. You need to ask yourself: Do you require money in the short and medium term? If yes, then debt MFs can be a better option. But if you are not going to need money anytime soon, then PPF would be a better option.